March 1 (Bloomberg) -- Consumer spending in the U.S. rose
in January even as incomes dropped by the most in 20 years,
showing households were weathering the payroll-tax increase by
socking away less money in the bank.

Household purchases, which account for about 70 percent of
the economy, climbed 0.2 percent after a 0.1 percent gain the
prior month, a Commerce Department report showed today in
Washington. The median estimate in a Bloomberg survey of 76
economists called for a 0.2 percent advance. Incomes slumped 3.6
percent, sending the saving rate down to the lowest level since
November 2007.

Employment gains, the rebound in housing and growing demand
for autos will probably keep supporting consumer spending in the
first quarter as the world’s largest economy picks up from an
end-of-year slowdown. Even so, rising gasoline prices and the
need to rebuild nest eggs may make it difficult for households
to match last quarter’s performance.

“It’s going to be touch and go for the consumer for the
next few months,” said Ryan Sweet, a senior economist at
Moody’s Analytics in West Chester, Pennsylvania, who correctly
projected the 3.6 percent drop in income. “The consumer is
going to be able to support the recovery, but they’re not going
to be able to take it” to a higher level, he said.

Stocks Drop

Stock-index futures held earlier losses after the report.
The contract on the Standard & Poor’s 500 Index maturing this
month dropped 0.5 percent to 1,506.3 at 9:17 a.m. in New York.

Projections for spending ranged from a drop of 0.2 percent
to a 0.4 percent gain.

The Bloomberg survey median called for incomes to fall 2.4
percent.

The slump in incomes in January was the biggest since
January 1993 and followed a 2.6 percent jump in December. Some
companies paid dividends and employee bonuses earlier than usual
before tax rates went up this year, removing a gain usually seen
in January. The Commerce Department estimated the January level
of wages was reduced by about $15 billion and December was
boosted by about $30 billion, reflecting the timing of the
bonuses.

The saving rate dropped to 2.4 percent from 6.4 percent.

Disposable Income

Disposable income, or the money left over after taxes,
dropped 4 percent after adjusting for inflation, the biggest
plunge since monthly records began in 1959. The drop also
reflected the lapse of the payroll tax holiday. Excluding the
effect of the tax and other special factors such as the timing
of bonuses and dividends, disposable personal income would have
increased 0.3 percent in January, the same as in December, the
report said.

Adjusting consumer spending for inflation, which renders
the figures used to calculate gross domestic product, purchases
rose 0.1 percent in January for a second month, today’s report
showed.

Consumer purchases grew at a 2.1 percent annualized pace in
the fourth quarter, up from 1.6 percent in the previous three
months, as Americans bought more durable goods including
automobiles.

The economy grew at a 0.1 percent rate from October through
December, less than forecast, as companies reined in gains in
inventories and national defense outlays dropped 22 percent, the
biggest since 1972, Commerce Department data showed yesterday.

Little Inflation

Today’s report showed a price gauge tied to consumer
spending, which are the figures tracked by Federal Reserve
policy makers, was little changed in January from the prior
month. Over the past 12 months prices rose 1.2, the smallest
year-to-year gain since October 2009. The rate compares with the
central bank’s goal of 2 percent.

Excluding food and energy costs, prices climbed 1.3 percent
in January from the same month in 2012, the smallest year-to-year gain since April 2011.

“Available information suggests that economic growth has
picked up again this year,” Bernanke said earlier this week in
testimony to the Senate Banking Committee in Washington.

Still, Bernanke cited an estimate from the nonpartisan
Congressional Budget Office that the spending cuts known as
sequestration will cause a 0.6 percentage-point reduction in
growth this year.

‘Significant’ Burden

“Given the still-moderate underlying pace of economic
growth, this additional near-term burden on the recovery is
significant,” he said.

The expiration of the payroll tax cut in January, coupled
with climbing gasoline prices, are trimming discretionary income
and may damp household purchases in the first quarter.

Congress and President Barack Obama allowed the payroll tax
to return to its 2010 level of 6.2 percent from 4.2 percent at
the start of the year, which means an American who earns $50,000
is taking home about $83 less a month.

The average price of a gallon of regular gasoline at the
pump rose to $3.78 on Feb. 27, little changed from the previous
day’s rate that was the highest in more than four months,
according to AAA, the biggest U.S. motoring group.

On a brighter note, sentiment is rebound as employment
grows. The Conference Board’s sentiment index jumped in February
from a revised 58.4 in January, data from the New York-based
private research group showed this week. The measure’s 11.2-point jump was the biggest since November 2011, offsetting much
of the almost 15-point slide over the previous three months.

Interest Rates

Interest rates hovering near record lows and growing
availability of credit are buoying the auto industry, including
Fort Lauderdale, Florida-based AutoNation Inc., the biggest
dealership group in the U.S. Attractive financing may push sales
comfortably above 15 million this year, the highest since 2007.

“We have the best financing available for our customers
ever,” Mike Jackson, chief executive officer of AutoNation,
told a J.D. Power & Associates conference this month in Orlando,
Florida.

Cars and light trucks sold at a 15.2 million annual rate in
January after 15.3 million in December, according to data from
Ward’s Automotive Group. Including November’s 15.5 million rate,
auto sales over the past three months have been the strongest in
five years. February data is scheduled for release today.